Is the shale gas boom a bubble?

The U.S. shale boom, being touted as able to deliver 100 years of domestic energy supply, is nothing more than the latest investment bubble, asserts a report released this week by a veteran geologist.

J. David Hughes, a Canadian who served for 32 years with the Geological Survey of Canada, says the inflated expectations for natural gas and “tight oil” in boom areas far outpace the reality of what can be accessed and reasonably extracted.

His report , Drill, Baby, Drill, was released by the Post Carbon Institute where Hughes is a fellow. It refers to the fracking of natural gas across the US in active drilling regions such as the Marcellus and Barnett shale formations, in the Northeast and Texas, respectively, and also the Bakken and Eagle Ford oil fields, where hundreds of wells are being drilled in a latter-day oil boom that’s raised hopes for domestic oil producers and consumers.

Fracking Follies

These regional boom areas have ‘allowed previously inaccessible shale gas and tight oil to reverse the long-standing decline of U.S. oil and gas production,” Hughes concedes in the summary of his findings. “This production growth is important and has provided some breathing room.”

“Nevertheless, the projections by pundits and some government agencies that these technologies can provide endless growth heralding a new era of "energy independence," in which the U.S. will become a substantial net exporter of energy, are entirely unwarranted based on the fundamentals. At the end of the day fossil fuels are finite and these exuberant forecasts will prove to be extremely difficult or impossible to achieve.”

These “fracked” wells are rapidly depleted and the area of exploration also quickly reaches a point at which the expenditure of time and effort to extract more gas or oil reaches a point that no longer makes economic sense, his report concludes.

“Wells experience severe rates of depletion, belying industry claims that wells will be in operation for 30-40 years,” the report notes.

You can use this map at the Drill, Baby, Drill report to see information about individual shale gas and oil wells near you.

As evidence, the report offers an interactive map of the natural gas and “tight oil” boom regions in which the data for 63,000 individual wells and the exploration region can be seen. The graphic reveals that the fuel being drawn from these wells tapers off quickly, supporting Hughes’ thesis that there’s not as much natural gas available as industry and investment boosters would have the public believe.

So many wells are required to keep production high, the economics or fundamentals can erode as quickly as the natural gas supply, he reports.

The Wall Street Factor

So who benefits? Wall Street investors and traders have made money on the upswing in natural gas production and then on the backside, on mergers and acquisitions, as the companies consolidate in an effort to keep going.

More on this angle is available in another report released this week by the Energy Policy Forum. Was the Decline in Shale Gas Prices Orchestrated by Wall Street?, a report by financial consultant Deborah Rogers, argues that the boom and decline in natural gas has been an engine for trading profits, but the benefits of the gas boom will bypass the wider U.S. population.

Key points from Rogers’ report:

Wall Street promoted the shale gas drilling frenzy, which resulted in prices lower than the cost of production and thereby profited [enormously] from mergers & acquisitions and other transactional fees.

U.S. shale gas and shale oil reserves have been overestimated by a minimum of 100% and by as much as 400-500% by operators according to actual well production data filed in various states

Rogers, who has spent 30 years in financial circles and served on the advisory council for the Dallas Federal Reserve Board, says that natural gas companies are understandably turning to exportation to get better prices for their output. That could turn the US into an energy exporter, but it belies the marketing hype that natural gas will boost domestic supplies and make the US energy independent. From her report:

Beginning in 2009, the number of M&A deals within the shale market began to explode. Initially, many transactions involved foreign investors such as Chinese, Korean, French and Norwegian companies looking to purchase U.S. shale assets. The banks effected these transactions for large fees.

The natural gas industry touts the longevity of natural gas supplies and the jobs they support.

Rogers view aligns with Hughes’, in that both argue that the natural gas industry should be better scrutinized, and soon, because it will be US citizens who bear the pollution burden, and not necessarily receive the benefits (albeit smaller than predicted) of unconventional natural gas extraction.

Back to Hughes’ assessment, there is no shortage of people who disagree with him. America’s Natural Gas Alliance (ANGA) promises to “power America for generations to come” and proffers a different interactive map — this one showing the thousands of jobs and estimated economic benefits related to gas drilling.

Hughes’ report itself cites a sampling of the rosy predictions for natural gas made by financial and energy analysts, but only to show the extent of what he considers a mythology of fossil fuel abundance. This storyline is often recited by Washington leaders, including President Barack Obama, who is quoted in Drill, Baby, Drill as mimicking the marketing line:

We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy.

Hughes isn’t the first person to question the natural gas boom. But his report, nine months in the making, delves into some details that may not be widely understood.

A key point in his analysis is that fracked wells produce a burst of natural gas, followed by a steep drop off in production. This is an acknowledged phenomenon of hydrofracturing, in which gas formations inaccessible to conventional vertical drilling are blasted open along a horizontally bored well, using high pressure fluids containing water, sand, lubricants and other ingredients. It’s the reason that “fracking” requires multiple wells be drilled from eqach pad site.

Horizontal fracturing or “fracking” is by design more intensive than conventional drilling.

But Hughes maintains that the ramifications of that, the extra toll on the environment as well as the underlying economics, should play a more prominent role in the public discourse.

The public has been getting an education in hydrofracturing or “fracking” as drillers have expanded into the countryside and even into cities, like Fort Worth and Dallas. The extensive drilling, potential migration of toxic fluids, heavy dependence on water (a well can require two to five million gallons of water) and problematic disposal of fracking fluids are among the reasons dozens of citizens’ groups opposing “fracking” have sprung up in Colorado and Texas to Ohio, Pennsylvania and New York.

The debate has often centered on environmental risks, with activists arguing that the pollution of the gas industry jeopardizes water and air quality in nearby communities.

Hughes says the economic risks of relying on natural gas need more exploration as well, because the U.S. is risking future energy and economic security by counting on a fossil fuel abundance that could be, at least in part, a marketing mirage.

“Constraints in energy supply are certain to strain future international relations in unpredictable ways and threaten U.S. and global economic and political stability,” he writes. “The sooner the real problems are recognized by political leaders, the sooner real solutions to our long term energy problem can be implemented.”

( J. David Hughes served as Team Leader for Unconventional Gas on the Canadian Gas Potential Committee, where he coordinated the recent publication of a comprehensive assessment of Canada's unconventional natural gas potential. He has researched and lectured on global energy and sustainability issues in North America and around the globe. He is a board member of the Association for the Study of Peak Oil and Gas – Canada and is a Fellow of the Post Carbon Institute, according to his biographical sketch published in the report.)